May 2025*
US equity market leadership has paused and is potentially reversing following steady outperformance since 2011. Our macro framework indicates that the US market remains exceptional, though less so than a few months ago. US tariffs are likely to settle at levels lower than those announced in April; however, the damage to business confidence and eroding perceptions of US exceptionalism will persist, weighing on the US dollar and US asset prices. We downgrade the US to underweight. We maintain overweights in non-US markets (EM, the Netherlands, and Japan) that have significant exposure to tech hardware and supply chains closely tied to AI growth.
The first half of 2025 will likely be remembered in financial market history books. Following ‘Liberation Day’, markets digested the potential for US tariff rates to rise above the 1930s Smoot-Hawley levels (see Chart 1), experienced a spike in volatility (VIX > 50 on April 8th), and saw a 19% drawdown in the S&P 500. At the time of writing, the US equity market is rebounding in anticipation of a potential further softening in tariff policy. Trade negotiations between the US and various countries are ongoing and may deliver positive or negative surprises.
Our base case is that the effective US tariff rate will be higher by the end of President Trump’s second term than at its start. However, we expect negotiations to lower some of the rates proposed in April. Product-specific tariffs (e.g., on steel, aluminium, and autos) will likely remain elevated due to the push to onshore strategic industries for national security reasons. Moreover, negotiations with China and Europe could prove more challenging, as both are large economies capable of retaliation. On a more optimistic note, the reciprocal tariffs are likely to decline for most US allies. Political, economic, and market pressures all support some easing of tariffs.
The risk of a US recession this year has increased due to the trade shock and heightened uncertainty for businesses. A negative growth shock complicates budget negotiations and poses a risk to the Republicans’ slim majorities in the Senate and House ahead of the 2026 midterm elections. These are among the factors likely to drive some easing in trade restrictions. Still, we do not expect a full reversal of the US tariff stance. Rather, we anticipate moderation from extreme levels. Regardless, multinational firms will likely continue to face uncertainty in hiring, capex, and supply chain planning. Delays in these areas remain a headwind for growth and earnings. Tax cuts, deregulation, and lower oil prices are potential positive offsets later this year.
Downgrades to US growth and lower real rates are two cyclical drivers partially explaining US dollar weakness this year. In the IMF’s April 2025 World Economic Outlook, the US saw a larger downward revision to 2025 growth (-0.9 ppt vs previous quarter) than China (-0.6 ppt), Japan (-0.5 ppt), and Germany (-0.3 ppt). This downgrade coincides with still-elevated long-term valuations for the US dollar, implying further downside risk. A less ‘exceptional’ US may prompt increased diversification away from US assets. Recent appreciation pressures in some Asian currencies, such as the Taiwanese dollar, suggest foreign capital is shifting. Overall, the US dollar outlook appears to be softening – historically a supportive backdrop for non-US equities (see Chart 2).
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| US | ↓ | |||||
| Canada | – | |||||
| Eurozone | – | |||||
| Switzerland | – | |||||
| UK | – | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | – |
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Canada | – | |||||
| Eurozone | – | |||||
| Switzerland | – | |||||
| UK | – | |||||
| Japan | – | |||||
| Australia | – | |||||
| EM | – |
*This publication reflects asset performance up to 30 April 2025, and macro events and data releases up to 8 May 2025, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.